I am interested in Stablecoins and recently came across NuBits. I’ve learned that NuBits lost the peg last year but was able to reestablish it. I have also read many posts on this site that indicate the process was very contentious. Some members have alluded to losing money and to debt that NuBits owed to B&C exchange.

Reading over these posts has left me wondering “What the heck happened?” How did people incur losses? Simply from the drop of the NuShare price? Or in other ways as well? Some clearly feel that they were not treated fairly by those managing liquidity operations. Was last years price drop the catalyst for this or were there longer running issues.

With regard to debts owed to B&C, how were they incurred, and why has this become such a bone of contention?

These are a lot of questions. I am curious about these issues because these kinds of governance issues affect many crypto projects. Stable coins seem particularly susceptible since they tend to rely on very active governance. I am very interested to hear the perspectives of members of the NuBits community about these issues.

The major point of contention regarding how and why people are upset has to do with the initial distribution of Nushares to secret investors coupled with a series of occurances on the Nubits chain that caused people to lose confidence in the decentralized nature of Nu’s consensus mechanism, such as grants passing with very little forum representation or high profile custodians losing money and being awarded more without repurcussion or accountability.

A graphical timeline might be something to have Marketing produce next year.

I believe these two posts summarize where I stand. What @Nagalim states is at least essentially true. I wasn’t around for the creation of Nu.

There were warnings made regarding future peg stability early 2016. The liquidity team made efforts to utilize NuShare sales (tier 6) for peg support, but one individual withheld the proceeds from NuBit holders and the team didn’t resolve. With no more backing in sight for US NuBits, confidence was severely damaged. @Phoenix was voted in to take control of liquidity. He trusted me to carry out NuShare auctions, hold the proceeds, and push the peg back to $1.00 over the next two months.

There a variety of ways to explain what happened. However, there was an effort to broadly decentralize liquidity operations when Nu was very small and had few resources. We appointed multisig signers holding large amounts of funds needed to keep the peg and only paid them $150 per month. The signers proved to be unprofessional, incompetent and refused to follow shareholder direction from blockchain votes. There was a large NuBit sale that filled them with fear, even though there was no rational reason to be concerned about our ability to keep the peg after the sale. In an irrational panic, they essentially locked down all funds and refused to do anything at all.

There was, in a sense, two communities pitted against each other: one advocating for reliance on proof of stake and blockchain based governance, and another that in essence advocated for a poorly articulated system I will call proof of forum post. They thought those who posted here regularly should make the governing decisions. All funding comes from the blockchain through proof of stake, so the part of the community avocating for governance by proof of forum post was starved out and sidelined.

Regarding the distribution, a small solution with a small market cap will certainly have fewer shareholders than a large organization with a market cap in the billions of dollars. The vast majority of NuShares were sold on open public markets available to all. No one knows what the distribution is, but everyone had the chance to participate. I contend that those who actually put up their funds to gain a stake should control the network, regardless of how many people that is.

Our liquidity design benefits those who support Nu and NuBits. Over time it shifts ownership of Nu to investors who trade NuShares to support NuBits’ pegs, establishing a mutually beneficial relationship. Tier 6, the “backbone reserve”, is a funding source with incentives for backing of NuBits and investing in Nu.

That is an interesting explanation. I had thought of it as a kind of principal-agent problem where the interests of the principals, or shareholders, are not aligned with those of the agents.

But you seem to be saying that the agents (appointed multisig signers) were simply not qualified to do the job. While they may have had the same interests in maintaining the peg, they had a different opinion about how to do it. So while the shareholders were supposed to control operations, they did not have a mechanism for enforcing that control during the time the price was under pressure. Is that a fair summary of your point of view?

From what I have read it sounds like the solution to this issue was to centralize liquidity operations. Do you see any drawbacks to doing that? Has any additional control been put in place over those run the operations? Or is the idea to rely on a smaller number of more reliable people?

I had thought of it as a kind of principal-agent problem where the interests of the principals, or shareholders, are not aligned with those of the agents.

Agreed. I suspect many multisig signers owned little or no NSR. One of the things we are discussing as we form a new multisig group is each signer proving a stake.

coinforward:

But you seem to be saying that the agents (appointed multisig signers) were simply not qualified to do the job.

It was both incompetence and a misalignment of interests. It appears they didn’t have a grasp of how exchange markets operate. They were not able to predict how the market would react to actions they might take. They weren’t required to understand market dynamics. They only needed to follow the fundamental principle that we sell NSR to support the currency. They chose not to do that.

coinforward:

While they may have had the same interests in maintaining the peg, they had a different opinion about how to do it.

The evidence failed signers had an interest in maintaining the peg is scant at best, as I recall. I don’t recall any suggestions about how to maintain the peg from failed signers. It was strange. They seemed intent on halting all operations is a disorderly manner without any suggestions about how to move forward. They simply claimed the design was fatally flawed. What has happened since has proven otherwise.

coinforward:

So while the shareholders were supposed to control operations, they did not have a mechanism for enforcing that control during the time the price was under pressure. Is that a fair summary of your point of view?

I wouldn’t say they were supposed to control operations. Rather, agents were supposed to support the interests of shareholders because shareholders would refuse to fund them in the future if they didn’t. It is true that for a short period of time shareholders did not have a mechanism to support the price. A custodial grant takes at least a week under normal circumstances. Even more time is needed to plan new liquidity operations (the details of who is doing what for what compensation). This is why several weeks passed without peg support, but it continued in earnest afterward.

coinforward:

From what I have read it sounds like the solution to this issue was to centralize liquidity operations. Do you see any drawbacks to doing that?

That is mostly true, with the caveat that the centralization of liquidity operations (which didn’t impact the peer to peer consensus method for controlling movement of shareholder funds) needn’t be permanent. We needed highly qualified and responsible people making the decisions. Those people aren’t cheap, so you can’t have a bunch of them when your budget is very modest. It was a very pragmatic shift. It angered a lot of people, but it worked quite well. There are certainly a lot of drawbacks. It seems they are well understood and haven’t escaped anyone’s attention.

Multisig is designed to be fault tolerant in the sense that you can have one or two failing signers and still transfer funds. We felt somewhat safe because of this. We just had one too many failures in each signing group.

Nu is a great experiment that illustrates what kind of decentralized governance a PoS blockchain can do.
The biggest drawback is that most contributors are anonymous and this impacts a lot the confidence that people can put into it. As a direct consequence, people do not buy NSRs as they buy Monacoin for example, so the price and the liquidity remains meager.
Then it gives little incentive to the professionalization of minting=securing the network by holding shares.
This is related to what @Phoenix tells regarding the amateurish liquidity team that maintained the peg before it fails (i was a part of it) .
I hope the efforts to create a real team of dev in Vancouver proposed by @Phoenix to @jooize will help make the project public.
If we want to get big, we need a professional public team that is held accountable for their mistakes and actions.

@cryptog it seems then that NuBits is moving to a more centralized model, at least for execution. Some of the posts I have read express some concern over the level of decentralization. Yes, governance is decentralized via a PoS blockchain. But some in the community seem to be concerned that the majority of the shares are concentrated in relatively few people.

@Phoenix mentioned that the shares were available to anyone in public open markets. To me, that speaks to the fairness of the process not the extent of decentralization. @Pheonix seems to be arguing anyone could have bought NuShares, therefore those that did buy have every right to use them. That sounds right to me.

But I think there is a separate issue as well: the extent of decentralization. In an extreme case, you could have shares sold openly but only one person chooses to buy. That system may be fair, but it wouldn’t be decentralized.

I am curious how others think about this issue. Especially given the rise of other stablecoins like Tether that are explicitly centralized. What are the pros and cons of decentralization for stablecoins? How does that affect the future of NuBits?

The biggest drawback is that most contributors are anonymous and this impacts a lot the confidence that people can put into it.

There was a time when many people involved did not expose their real name and identity. Those days are gone, as they should be. I believe I am the only person regularly paid by Nu that doesn’t have their real name associated with their work here. Remember, I don’t hold any shareholder funds. No one can hold any shareholder funds (so far as I am concerned), even as a multisig signer, without letting us know who they are, among other requirements.

cryptog:

I hope the efforts to create a real team of dev in Vancouver proposed by @Phoenix to @jooize will help make the project public.

If we want to get big, we need a professional public team that is held accountable for their mistakes and actions.

But I think there is a separate issue as well: the extent of decentralization. In an extreme case, you could have shares sold openly but only one person chooses to buy. That system may be fair, but it wouldn’t be decentralized.

Decentralization really matters, but there are more important matters, like meeting our customers’ needs. It is one value among many. Bitcoin wasn’t decentralized when it was small. All these blockchain networks start from a single point. They require growth to acquire decentralization.

There have been lots of people who have loudly screamed for more decentralization. Ironically, these individuals have been instrumental in concentrating share ownership by decreasing the NuShare market cap, decreasing the number of NuBits in circulation and shrinking the community. These voices have shrunk our community a great deal on at least two occasions: by abandoning the peg and starting a separate chain purported to have better distribution, by excluding NuShare holders that voted to support the NuBit peg. It is far from clear that such a method will produce more decentralization, and indeed it has not seen any success. The new chain, Augeas, is inactive and illiquid. We must conclude many who have advocated for decentralization on this forum are either stupid, incompetent or have ulterior motives. I suspect all three are the case to some extent. When someone wants to be involved and posts to the forum a great deal but has no NuShares, they tend to feel unempowered and they express that by complaining about the lack of decentralization. What they are really saying, in many cases, is they would like more power themselves. But nothing I have seen these people do promotes decentralization. Take Sentinelrv, for instance. He has complained about a lack of decentralization. His solution? Sell his stake. Many others have done they same. Of course, this will only decrease the degree of distribution.

I have always said the only practical road to robust decentralization is growth. It will surely bring more decentralized ownership, and I doubt any other approach will be successful. Those who have advocated most strongly for decentralization on this forum are the very people who have effectively opposed decentralization with their own actions.

I wanted to send a thank you out to @coinforward for his article on NuBits. It demonstrated an excellent understanding of our unique history. It was quite even handed: a solid piece of journalism. I would like to see more of you around here @coinforward.

There are a couple clarifications I would like to make that pertain to the article. Since September 2016 the peg has been more stable than the coinmarketcap chart suggests. There are some very brief and large spikes and drops in their chart, but with very little volume. A real price swing of that magnitude and speed would bring high volume. They are just bad data points. Some exchange listings of NuBits are supported by liquidity operations, some are not. Occasionally an unsupported exchange listing will have a tiny size trade far from the peg price. Smaller deviations appear to occur regularly but don’t actually happen at all. They appear in the chart because almost all our NuBit exchanges occur for Bitcoin. No agrees exactly on the price of a Bitcoin at any one moment. We have a way of calculating that using an average of prices from a variety of exchanges. Others, like coinmarketcap, will invariably use a slightly different method, sampling a different set of exchanges to understand the Bitcoin price. It is the disagreement about the Bitcoin price that causes coinmarketcap.com to suggest our peg is slightly above or below $1.

Finally, the motion to fire me had less than 10% support. There are quite a few people who post on the forum who are frustrated with me. They are mostly the people who got left out when we decided to use a smaller group of highly professional people. Regardless, I am much more popular with shareholders (who hold the power of the purse) than forum content suggests.

Thanks @Sabreiib for that thoughtful and insightful post. I agree with almost everything you have said, and I think what you are saying is important.

There are just a couple clarifications I would like to make:

Sabreiib:

Phoenix:

We must conclude many who have advocated for decentralization on this forum are either stupid, incompetent or have ulterior motives. I suspect all three are the case to some extent.

This saying is a bit unfair, many of forum members are BTC fans, and decentralization is their belief.

I am sorry if my previous communication lead to misunderstanding. I am not suggesting holding decentralization as a value is incompetent. Rather, I am observing many key forum posters that have expressed decentralization as something they value highly have actually effectively opposed decentralization with their actions.

Decentralization has many characteristics. Some are good. Some are bad. Whether particular characteristics are good or bad may depend on the context a great deal. Consider the present context of Nu: our blockchain protocol to control creation of assets and authorize blockchain transactions is indisputably purely peer to peer, with control shared by all NuShare holders with at least $25 of NuShares (at today’s price), in proportion to the size of their NuShare holding. The protocol can’t be decentralized further, without doing something that would remove Nu from the realm of proof of stake. I haven’t heard anyone suggest our protocol needs to be decentralized. That is really important not to lose sight of. When I became Chief of Liquidity Operations and created a hierarchically organized group to provide liquidity, I didn’t change the decentralized blockchain protocol in any way. In fact, I presided over a radical dilution of NuShare holders by more than tripling the number of NuShares circulating in 2016 by offering them for sale in completely public venues, accessible to all. The current degree of decentralization of NuShare ownership could only be limited by the number of people interested in putting up $2 or more for a stake.

So when we talk about the lack of decentralization at Nu, we are talking about what is going in one department that decentralized shareholders have consistently supported though our decentralized blockchain protocol. Now back to the notion there are some costs and problems with decentralization. One of those is expense that comes from redundancy that is inherent in decentralization. A second is that participants tend to be less informed and have less expert knowledge as decentralization matures. Thirdly, participants in decentralized systems tend to have less at stake than in centralized systems. These three drawbacks are key to understanding why liquidity operations needed to be centralized in recent times.

Every liquidity provider and multisig signer must be paid one way or another. With robust decentralization, that can be really expensive. Nu was spending a large share of its operation costs on this two years ago. Despite the high expense, compensation to each participant was quite insufficient. We didn’t pay enough to get reliable, professional people with the kind of economic knowledge they need to make decisions about how to operate in NuBit markets. It surprised me, but it appeared no one involved had an understanding of how the market would react to various market interventions. I understood those dynamics due to my professional background, but failed to comprehend how specialized this knowledge is. We discovered monetary policy, even something as simple as maintaining a peg, requires expert guidance. Paying even a few people with this expertise is completely unaffordable at this time. Even I am part time. Esko and I have a great deal at stake. How about failed signers like @woodstockmerkle and @masterOfDisaster? We don’t know that they had anything at stake. That was a mistake. We allowed the founding principle of the network, proof of stake, to be violated.

So, decentralization adds certain types of strength and reliability. But it is also presents a host of risks and costs that have to be managed. It may be that the costs of properly mitigating those risks is greater than the benefits of decentralization in liquidity operations in some contexts. That doesn’t mean it will always be that way. It depends on a variety of factors, perhaps the most important of which is the quantity of resources that can be brought to bear.

The decentralization of handling shareholder funds is at hand: I aim to have multisig signers who prove a stake in NuShares, are dependent on Nu for their livelihood at the present time, have a proven history of responsible and compliant actions, have clear and well thought out contracts with shareholders, will subordinate to expert decisions, demonstrate a commitment to contract law, have a human relationship with one another, among other things. It is a demanding list. It is a complicated undertaking that takes time. I understand that delaying an implementation brings large risks, as does a poor (and rushed) implementation.

Recently, things like reviving B&C Exchange and hiring new people to work on Nu’s problems has been a higher priority to me. Everything takes longer than anyone would like, including me. To all of you who care, please consider creating solutions rather than complaining about some problem we haven’t solved yet. Remember, our decentralized governance model will empower and compensate anyone who can convince shareholders they are bringing value to the network.

Sabreiib:

I have brought a design of good decentralized liquidity(modified Hayek model), but still no enough support from this forum.

I suspect you are being a bit too impatient. I think there is a lot of support and interest. It is a big undertaking, among other big undertakings that are splitting our attention. I can tell you Esko and I have had detailed discussions about Hayek money and our options for implementation of one, in just the last week.

I don’t recall you presenting a design with enough specificity to be suitable for implementation. If I missed it, please link to it.

It is a medium term objective of mine to release a currency on the Nu blockchain that is both more stable, and maintains it’s value better than USD or CNY (and USNBT and CNNBT). There are many details to attend to. I wish I could get it done faster, too.

@Phoenix, remember when you gave away hundreds of millions of NSR to people, some who did nothing more than support you verbally here on the forum? You are the last person here that is qualified to speak on decentralization of share ownership. That is a big part of Nu’s history that I’m sure you are not proud of and didn’t mention in this public interview.

@Phoenix, remember when you gave away hundreds of millions of NSR to people, some who did nothing more than support you verbally here on the forum?

This statement is partly greatly exaggerated, and partly simply incorrect. If you would review the facts available to the public on this forum, you will find that there were I believe 2 people (maybe 3) who were rewarded for their helpful contributions on the forum. I’m pretty certain the aggregate reward for those individuals was less than $1000 USD in NuShares, and less than 2 million NuShares. Therefore, while you claim it was “hundreds of million of NSR”, it was, in fact, hundreds of thousands of NSR, and for a different reason than you have claimed.

Why are you so determined to so grossly twist the facts against me and the integrity of the project?

Because I do not feel this project has had the level of integrity you claim, with your own twisting of the facts. It happened, as you have admitted, which is something that should be written forever into Nu’s history.

Feelings are not very helpful in bringing us to understand the truth. Many people are angry some things didn’t go as expected. You might be feeling that. I have certainly felt that. It is common to blame the most prominent target, though a more thorough investigation would show that I am solving the serious problems created by multisig signer misconduct in 2016. It is a process, but there has been great success, with the NSR market cap and NuBit supply both recently reaching new all time highs.

It is time to stop being angry. NSR is up 1600% this year. Normally, that is considered a phenomenal performance. Surely that should dispel some anger, or does it need to be 16000% annual return before you will be satisfied with progress?